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Common Cents

Mass merger

Ralph Murphy

(3/2016) Recent stock market and commodity price volatility have pundits drawing parallels with the 2008 worldwide, financial crisis that actually may be the source of the current problem. A drop in housing prices at the time triggered an equity drop in the value-inflated market and a "liquidity" scramble by mortgage lenders mostly based in New York. The Federal Reserve managed to coordinate a "pooling" of 60 nation's Central Banks that then accessed members' funding and bailed out the bankers while retaining joint control of the foreign funds.

Subsequent investment and income patterns of peripheral nations such as China and Brazil are really suspect as to sourcing and they may involve the Bank for International Settlements (BIS) based in Basel, Switzerland. The BIS was founded by 8 international powers in 1930 to maintain control of war reparations leveled at Germany following World War I. It continued with leadership changes, ironically controlled largely by the Germans during World War II, but once again allied after the conflict. After World War II the BIS bank sought to "make monetary policy more predictable and transparent among the 60 (including developed nations of G-7) member's Central Banks." It would further afford "international monetary and financial cooperation and serve as a bank for the Central Banks". By "controlling foreign exchange reserves and policies, 'arbitrage' or price harmony between foreign nations, the Central Banks' reserves as well as a regulatory role".

The BIS has extensive capital access and by self ascribed legal accord to issue economic power. It's not a United Nations affiliate. It sets "capital and reserve requirements" that include all memberís Central Bank assets such as "stocks or equities, debt (as bonds), precious metals, pension holdings, foreign reserves, as well as requited reserve funds" of member private banks. The levels of holdings can vary greatly between the Central Banks as policies differ as do near term reserve requirements. Some nations keep commodity earnings as "Sovereign Wealth Fund" issue, to others that is a private sector concern not always placed with banks. At a point in time, the BIS access is the largest pool of stored funds ever known for discretionary investment. The Board of Governors who direct policies include the heads of Central Banks of the 17 member nations including America's Federal Reserve, the British, Chinese, French, Japanese and European Central Bank (ECB), but oddly not the German Bundesbank which contributes the most cash to the ECB as ostensible leaders.

The bank could easily hold over $22 trillion. The US alone provided over $4 trillion and again there's variance as to levels per reserves, but the opportunity for mismanagement is far too high. It appears "self policing" as non regulated beyond understandings between members and whoever directs the Governors . It is not alone as to policy formulation or execution. The need as to impetus is also suspect. The 2008 financial crisis was "jarring" to equity markets and the bank system in America- especially four major concerns led by Citigroup. The banker "bailouts" would have had to file for bankruptcy with combined losses of hundreds of billions of dollars. Nothing like the multi- trillion dollar bailouts of the 1980's, but still- a lot of money. The "too big to fail" rallying call for the bailouts managed to prop the concerns and led to the merger of Central Bank assets which never dropped control as the private banks were once again solvent.

That alliance of Central Banks against what really are historic competing interests is a "recipe" for trouble. If the statistics are accurate- there may already be a huge problem in the lending pattern for retrieval or retention- especially for the People's Republic of China (PRC). In the 1990's this highly populated, communist nation had one of the lowest income levels per person (per capita) in the world. Total earnings were in the hundreds of billions of dollars. Much of them in foreign, multinational corporations. . By 2010 reported earnings had leaped to $5 trillion dollars without anything approximating the product base for production.

This past year the PRC is said to have the second strongest economy in the world at over $10 trillion. Again, there is an inflow of money, but no new industry beyond foreign ones- and those largely 'offshore', secondary western issues. Shanghai has suddenly jumped to become a source of financial capital markets as Hong Kong regional politics stymie Beijing. There are issues as well with China's domestic currency or the Remindi. The Remindi is suddenly being proffered and traded as a foreign exchange alternative to the dollar and yen, but with no visible means of income base and it really isn't too much a "leap" to think a BIS member- nation is simply accepting an infusion, but not without accounting costs. The debt to GDP or earnings ratio in China is now the highest in the world. From an accounting viewpoint they have to pay back the money, but Beijing doesn't seem to control the cash. Ventures, to include infrastructure projects in Africa, the Far East and Latin America are all credited to Chinese money, but there is no apparent income source amidst extreme poverty at home.

It would be a convenient Chinese debt problem, but they can't repay the trillions of dollars associated with their domestic and world ventures. That bill may be sourced to funds of the BIS. The pooled- assets system may be about over though. It will prove very difficult to repatriate much of the leant funds as they are dispersed. Again its formally a China debt issue, but they're being "used" as the projects are mostly tied to their peripheral interests.

In a worst-case scenario, the stored Central Bank funds are vastly depleted. Transaction currency held by private banks, businesses and citizens will continue to circulate if not sent to federal storage. It could continue to be sent to emerging markets such as China in the current system with almost no chance of investment return. Much of the cash lent is surely gone due to artificial demand created by unconventional, one- time sourcing in a BIS structure that threatens the health of central banks that are routinely the national "lender of last resort". It can one day be restored to individual host lenders along with sound regulation and international competition- to safeguard assets. But, if the statistics are right- funding attributed to China, such as Third World infrastructure projects, will actually be paid by BIS members. Watch the 17 member BIS Board of Governors and their backers though - as their dealings are highly suspect.

Ralph Murphy is a former member of the CIA Headquarters Staff in Langley, VA.

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